LS5 - Profit And Loss

Question 1

What costs do economists include that accountants typically do not?

Answer 1

Economists include opportunity costs in addition to private costs.

Question 2

What is opportunity cost?

Answer 2

Opportunity cost is the value of the next best alternative forgone

Question 3

How do economists calculate profit?

Answer 3

Profit is calculated as revenue minus costs, including private and opportunity costs.

Question 4

What is normal profit?

Answer 4

Normal profit is the minimum reward necessary to keep factors of production in their current use, where revenue equals total costs (including opportunity and private costs).

Question 5

What happens if a firm fails to earn normal profit?

Answer 5

The firm would cease production in the long run, reallocating its resources to more profitable uses.

Question 6

What is supernormal profit?

Answer 6

Supernormal profit occurs when revenue exceeds all costs, including opportunity and private costs.

Question 7

What is the traditional objective of firms according to economic analysis?

Answer 7

The traditional objective is to maximize profits.

Question 8

why wont a firm have pricing power?
How does a firm without pricing power maximize its profits?

Answer 8

if the firm olny owns a small share of the market.
By choosing the output level where total revenue is furthest above total costs.

Question 9

What rule can firms use to maximize profits?

Answer 9

Firms maximize profits where marginal cost (MC) equals marginal revenue (MR).

Question 10

see onenote for Figure 1 Profit Maximisation for a firm with no pricing power

Question 11

Why is the MR curve horizontal for a firm with no pricing power?

see onenote for diagram!

Answer 11

Because the firm receives the same revenue for each additional unit sold.

Question 12

What happens if a firm produces less than the profit-maximizing output (q*)?

Answer 12

The marginal revenue from additional units exceeds the marginal cost, increasing profits.

Question 13

What happens if a firm produces more than the profit-maximizing output (q*)?

Answer 13

The marginal cost exceeds the marginal revenue, reducing profits.

Question 14

How does a downward-sloping demand curve affect a firm’s total revenue curve?

Answer 14

The total revenue curve will initially increase, then decrease after reaching a maximum.

Question 15

What is the shutdown point for a perfectly competitive firm?

Answer 15

T he shutdown point is when the firm cannot cover its average variable costs (AVC).

Question 16

Why might a firm continue to operate at a loss in the short run?

Answer 16

If the firm covers its variable costs, it can contribute to fixed costs, reducing overall losses.

Question 17

When will a firm shut down in the short run?

Answer 17

W hen the price falls below average variable costs (AVC).

Question 18

When will a firm shut down in the long run?

Answer 18

When the price is below average total costs (AC).

Question 19

How does remaining open at a loss affect a firm’s fixed costs?

Answer 19

Remaining open can allow the firm to make a contribution toward fixed costs, reducing overall losses.

Question 20

In the short run, at what levels of output will a firm continue to operate?

Answer 20

A firm will operate where marginal cost (MC) is above average variable cost (AVC), such as at output levels Q1, Q2, or Q3.

Question 21

What does the MC = MR rule indicate for firms with pricing power?

Answer 21

Even with pricing power, firms maximize profit where marginal cost equals marginal revenue.

Question 22

see onenote for fig 4 shutdown points